ECONOMIC AFFAIRS: A future fund to secure Australia's prosperity

by Patrick J. Byrne

News Weekly, August 7, 2010

The Commonwealth Government future fund should become a major sovereign wealth fund, used to ensure that resource industries remain in Australian hands and as a source of lending to business in the event of a major credit squeeze.

In the wake of the global financial crisis (GFC), Europe and the United States are currently suffering what Nobel Prize-winning economist Paul Krugman describes as being a "long depression".

Australia is facing a blow-out of government debt, the result of the Labor Government's recent stimulus package.

It is simultaneously facing a foreign debt crisis. Australian banks have to roll over around $600 billion in foreign borrowings over the next few years. (Australian Financial Review, June 18, 2009).

If our banks cannot borrow from European and US banks because of the GFC, then they may be forced to borrow heavily from China.

Reliance on China for both bank borrowing and for direct investment in the resources industry will risk Australia drifting out of the Western alliance and into the orbit of Beijing.

How will Australia be able to maintain solid economic growth while overcoming its addiction to foreign capital (particularly from China) in order to secure our nation's long-term economic independence?

There is a solution.

First, leading financial economist Saul Eslake has argued for the establishment of an Australian sovereign wealth fund "as a means of ensuring that future generations derived at least some benefit from the sale of Australian resources to China, India and other countries". (Fit for the future: Challenges for the next generation of Australians, Institute of Chartered Accountants, April 2010).

Eslake says this would "help to ameliorate public disquiet about equity investment in Australian resources projects by foreign state-owned enterprises or sovereign wealth funds, either by taking stakes in overseas enterprises or even (under clear and rigorous guidelines) taking stakes in Australian resource projects".

He said that it could be funded from "newly introduced resource-related taxes, or from future budget surpluses", following the example of other commodity-exporting states.

He suggested that the fund could be administered by the Commonwealth Government's future fund, which was established by former Treasurer Peter Costello.

Second, last year, six leading economists suggested that the federal government establish "a publicly-owned entity to offer essential services in Australia's finance sector" to, in effect, offer Australians a more secure, government-backed bank in the wake of the global financial crisis.

The economists included Joshua Gans, professor of management at the Melbourne University Business School, Nicholas Gruen, Christopher Joye, Stephen King, John Quiggin and Sam Wylie. (The Age, July 8, 2009; News Weekly, July 25, 2009).

They argued that this new financial institution was needed because of the risks posed to Australia from its "large foreign debt that has continually increased its liabilities via enormous current account deficits".

These ideas could be usefully combined. The future fund should be expanded into a larger sovereign wealth fund which could undertake a major investment and lending role in the economy.

An expanded future fund could finance the capital side of any stimulus package, reducing the demand for deficit budgets and thereby preserving the government's high credit-rating. It would help to separate significant government capital expenditure from recurrent expenditure, providing substantial fiscal flexibility to the federal government.

Such an entity could enable Australia to fund longer-term capital investment in infrastructure and industry such as the nation's resource industries.

This would reduce Australia's over-reliance on Chinese foreign direct investment (FDI) in the mining industry. At the same time, it would substantially help Australia to continue expanding its resources exports to China, but ensure that this expansion was on Australia's terms not Beijing's.

A healthy growing economy would ensure buoyant tax revenue and would thus take the pressure off the federal Budget, but without our future growth prospects having to depend on excessive borrowing from China.

If such a sovereign wealth fund were also given the authority to issue bonds, it could provide a conduit for superannuation funds wishing to invest in long-term patient capital, such as infrastructure. Much has been said about having infrastructure projects financed by superannuation funds, which now manage over $1,100 billion in investments. In reality, super funds do not have the expertise to manage infrastructure investments.

An expanded future fund would also provide other advantages to government. It would give valuable insight into the operation of the banking sector at a time when new regulatory measures are being considered worldwide, and provide an alternative means of ensuring credit in the event of another major global financial crisis.